Sunday, February 7, 2010

Toyota expected to announce second recall in two weeks - on new Prius

Toyota expected to announce second recall in two weeks - on new Prius

Toyota is set to suffer a further blow to its reputation by announcing a recall of the latest model of its Prius hybrid car.

The company is expected to announce this week how it will be dealing with a new braking problem on the Prius. Reports over the weekend suggested the company would announce a recall of around 3,500 vehicles in the UK with many times that number worldwide.
"We will make an announcement soon on the action we plan to take," a company spokesperson said on Sunday.
Toyota has suffered a series of setbacks in recent days with 180,000 cars recalled in the UK and close to 10m vehicles globally to fix accelerator pedals with the potential to jam.
The latest issue facing the Prius concerns the responsiveness of the brakes. Toyota has said it can be fixed with a change to the car's software, something that has already been done on models being produced since the end of January.
The company's reputation took a severe battering last week when US transport secretary Ray LaHood warned Toyota drivers to stop driving their cars for fear of accidents.
Last week Toyota president, Akio Toyoda admitted the problems the company was facing were severe: "We are facing a crisis," he said. "I offer my apologies for the worries. Many customers are wondering whether their cars are OK.

Jonathan Russell    Source- Telegraph,   HERE

Investment strategy

We rate the shares of Toyota Motor Buy/Medium Risk (1M), with a ¥4,590 target
price. Not only do we consider Toyota highly cost-competitive in established
areas, we believe it also has a strong lead over competitors in commercializing
new technologies, such as hybrid cars and the G-Book (telematics).

That said, even Toyota, which aims to be the strongest automaker in the world,
was forced to change its strategy to respond to the economic downturn in
Europe and the US triggered by the subprime loan problem. Toyota slumped to a
loss in FY3/09 due to a steep drop in auto demand and rapid yen strengthening.
While sales dropped from FY3/09 H2, Toyota continued to expand production
capacity and its fixed-cost burden increased sharply, causing earnings to
deteriorate sharply. In response, Toyota lowered its breakeven point by
undertaking emergency value analysis (VA) measures to lower CoGS and
reducing expenses in all areas. Toyota has completed inventory reductions, and
it began to increase production in November 2009 as the downturn in demand
bottomed out.

Toyota posted an operating loss in FY3/10 Q1, but recovered to profitability in
Q2 on the effects of cost reductions and scrap incentive programs. We believe
production growth accompanying a demand recovery and continued cost
reductions will be sufficient to cover the impact of a strong yen and keep Toyota
in the black in FY3/10 H2.

With think the likelihood of earnings momentum accelerating from FY3/10 H2
has increased due to such factors as recovering auto demand in Japan and the
US and demand growth in emerging market economies, and we recommend the
shares as a long-term investment. Toyota's strengths include its edge in hybrid
cars and the structural reforms it is implementing to lower CoGS at global
production plants in Europe, North America, and Asia, as well as group parts


We believe the major risks facing the auto sector are 1) forex, 2) domestic sales,
3) overseas sales, and 4) input prices, as these factors are major causes of
earnings volatility. We believe risks to our target price for Toyota include 1)
significant yen appreciation; 2) greater than expected demand declines and
fiercer competition in North America and Europe due to the weak economy; 3)
input price trends; 4) protracted sluggishness in domestic sales; 5) the potential
failure to expand production of models such as the IMV and low-cost cars in
Asia, where we expect earnings to grow; 6) the emergence of trade friction on
earnings deterioration at US automakers; and 7) earnings deterioration in
financial operations.

The impact on OP of Toyota's exposure to forex fluctuations vis-à-vis the US
dollar has increased in line with the expansion of its North American operations,
but given the risk of ongoing declines in sales volumes and growth in incentives,
we think the state of local sales competition bears watching going forward. The
expanded post-bubble aftermath in Western Europe and a lack of strong-selling
compact cars in China require caution regarding sales trends in those regions.
Furthermore, the financial crisis spurred by the subprime loan problem and
other factors has been having a serious impact on automobile demand in North
America, a major source of earnings for Toyota. We also need to carefully
consider the risk of prolonged earnings deterioration due to deepening
consumption restraint, as Toyota could suffer from reduced demand not only in
areas such as fuel-inefficient small trucks and luxury cars amid a consumption
pullback, but also in bread-and-butter passenger vehicles, with negative
implications for earnings in North America. A similar phenomenon in Europe
could be protracted as well. Greater than anticipated yen deprecation or a
recovery in auto demand might be catalysts for a share price rise. If these
factors manifest themselves differently than we have anticipated, earnings may
differ from our forecasts and the share price may not reach our target price.
We rate the shares Medium Risk (M) based on their three-year historical
volatility, which places them in the sixth through ninth deciles in terms of share
price risk compared with our coverage universe.

[citibank Noriyuki Matsushima]

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